Despite this recent acceleration in the FNB Holiday Town House Price Index, FNB does not expect that the Holiday Town market will overtake the Major City markets in 2015.
Off a low base, after some years of lagging the more primary residence-driven city markets, 2014 saw the FNB Holiday Town House Price Index showing its highest growth since 2007, and reaching a growth rate not too dissimilar to that of the more primary residence-driven Major Metro Residential Markets.
From a 2013 average house price decline of -0.1%, the FNB Holiday Town Index’s growth rate increased noticeably to 6.5%. This is the highest annual growth rate since the 14.9% rate achieved in 2007, which was the year prior to the “Great Recession”.
Since the end of the property boom around 2008, up until 2013, we repeatedly pointed to relative weakness in the strongly holiday property-driven residential markets.
Being non-essential in nature, holiday property buying tends to be more cyclical than primary residential demand, implying that certain smaller town residential markets, that are strongly driven by holiday property demand, should generally be more cyclical than major cities which are overwhelmingly driven by primary residential demand.
However, after a very long period of “abnormally” low interest rates, and some “de-leveraging” amongst higher income groups, gradually the confidence levels of a growing portion of the household sector in its ability to afford luxuries appears to have been increasing.
We have witnessed some of this confidence improvement in the perceptions of estate agents participating in the FNB Estate Agent Survey over the past year or so. The survey has recorded an estimated 3% of total home buying which is estimated to be holiday home buying over the past year or so, which is mildly higher than levels of 1-2% through much of 2010-2013.
The improving trend has not been a strong one, but suggests that demand growth has been sufficient to begin to reduce supply “overhangs” in many of the Holiday Town markets, thus supporting some improvement in average price growth off a low base.
It is important to emphasise, however, that this acceleration doesn’t reflect an overly-strong market, because the price growth comes of a relatively low base after the Holiday Town markets have significantly underperformed the metros in terms of price inflation in prior years.
To get a longer term perspective regarding relative price performances of the 2 markets, we look back to the pre-boom years of the late-1990s, as it was the holiday town markets that rose more strongly back in last-decades pre-2008 boom times than did the major metro markets.
Then, it appears that from 2009 onward the major metro relative price levels began to play catch-up to the holiday towns. Using 1999 a base for evaluation, nominal major metro price levels managed to catch up to, and overtake, holiday town price levels in 2013, and still remain slightly ahead based on levels at the beginning of 1999.
In short, the relative price positions of the 2 markets in 1999 have more or less been restored in recent years, after the Holiday Town market outperformed, and “got ahead of”, the Major Metro market from around 2004-2007, and then underperformed the metros for some years thereafter.
According to our estimates, since the 1st quarter of 1999 (when interest rates had just started to fall rapidly from a 1998 prime rate peak of 25.5%, which precipitated the start of the house price boom), the Major Metro House Price Index has grown by a cumulative 443.5%, as opposed to the Holiday Town House Price Index’s mildly lower 427.1%.
CONCLUSION
Despite this recent acceleration in the FNB Holiday Town House Price Index, however, we don’t expect that the Holiday Town market will overtake the Major City markets in 2015.
Economic growth is expected to improve mildly this year, but the Household Sector remains relatively highly-indebted and financially constrained.
Not only do we expect to see a significant increase in the effective personal tax rate this year, including a possible rise in the marginal tax rate, but it is old news that the taxes and tariffs relating to housing (municipal rates, water and electricity) still rise above consumer price inflation, limiting the attractiveness of a second home in the eyes of many.
Therefore, we would not expect holiday town price inflation to go much higher in 2015 than the 2014 rate.
These markets appear to have shown some “normalization”, after some years of weakness, but we still expect them to underperform the metros mildly.
*Note: The House Price Indices quoted in this report have been estimated using Deeds data transactions by individuals. Also note that the Holiday Town House Price Index reflects all property transactions by individuals those areas, not just transactions for holiday purposes.
